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A Perfect Storm Forming over Tesla (TSLA) Stock


By Michael Marcus

Price cuts, store closures, and a massive convertible bond payment: it’s a perfect storm of ambivalent news for Elon Musk’s electric car company. TSLA shares are showing the strain, with a $33 loss – 10% – since February 28.

It started last month. Tesla (TSLA) has long said that the Model 3 will have a base price of $35,000, making it the lowest-cost model put out by the high-end car company. Well, in February, Tesla shaved prices again, cutting $1,100 from the Model 3 available on its website and setting the base-line version of the car at $42,900. With tax credits, Federal incentives, and potential fuel cost savings, the company says the car will now cost the owner $35,000. It just doesn’t show on the sticker yet.

Also last month, Tesla announced that it will be closing a majority its showroom stores as part of its layoff and cost-cutting measures. This may or may not be good. As a way to avoid franchise requirements on auto dealerships, Tesla has always showed its cars in company stores while only processing orders placed online. Now, however, customers will not be able to go to the Tesla store and see the car live before placing that order.

Finally, on March 1, Tesla redeemed a $920 million convertible bond issue, making the payment entirely in cash. Again, this was not a surprise. The company had stated in the Q4 earnings report that it had $3.69 billion in cash on hand. Since the bonds were issued at a stock price of $359 (which the company hasn’t seen since December), the payment had to be made in cash. Going by the numbers, that means Tesla now has $2.77 billion in cash available.

Analyst Reaction

From Barclays, analyst Brian Johnson has been quick on Tesla’s current situation. He sees TSLA as a ‘sell’ proposition, with the company at a turning point between two alternative business models: high-end store cachet versus low-price online selling. Think Apple compared to Amazon. Johnson gives TSLA a $192 price target, suggesting a 30% downside to the stock and consistent with his ‘Sell’ rating. (To watch Johnson’s track record, click here)

 

In his comments, the analyst says, “Much of the bull narrative has rested on Tesla being the next Apple, selling high-volume EVs at premium price point and at high gross margins, in part aided by a unique branded retail presence — a narrative we see as undermined by the recent price cuts and closing of most of the stores […] The bull case is now shifting to Tesla becoming the next Amazon: undercutting comparable luxury sedans and gaining an advantage over rivals by selling online rather than at brick-and-mortar locations.”

The analyst does not see success ahead for Tesla on this path, noting that the carmaker will have to sell more vehicles in order offset lower margins, and that the first two months’ U.S. sales numbers of this year are not encouraging. He believes that the switch to lower pricing reflects a need to quickly boost sales and cash flow, to replenish the cash spent on the convertible bond redemption.

Overall, TSLA gets a ‘Hold’ rating from the analyst consensus, based on a split of 8 ‘buys,’ 7 ‘holds,’ and 9 ‘sells.’ The stock is trading at $276 now, and the average price target of $312 suggests a moderate 12% upside potential.

The coming months will likely show – by the hard data of pricing points and sales numbers – which of the two models Tesla will follow. The company will have to choose however; it is not likely to succeed if it falls between the two of them. (Get TipRanks’ free stock analysis report on TSLA)

 

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